Norfolk Southern’s Intermodal Segment Growth 21x Faster Than Peers

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Norfolk Southern

Norfolk Southern’s (NYSE:NSC) Intermodal Freight segment, which refers to the shipment of containers that can be moved from one form of transport to another, has seen revenues grow from $2.5 billion in 2017 to $2.8 billion in 2019. Why is this important? Norfolk Southern’s Intermodal business is 1.6x larger than that of CSX, and 1.3x that of Union Pacific in terms of volume. And over the past few years, the segment revenue growth has significantly outperformed that of its peers. CSX’s Intermodal segment revenues declined -0.2% between 2015 and 2019, while Union Pacific’s grew an estimated 0.8%. This compares with Norfolk Southern’s Intermodal revenue growth of a strong 17.2% over the same period.  Though looking forward, we expect these revenues to decline in 2020 to around $2.4 billion, reflecting a 14% y-o-y decline, as we detail in our interactive dashboard, Norfolk Southern Revenues: How Does NSC Make Money?

There are several factors behind the revenue growth over the recent years. The trucking industry was required to fully implement the Electronic Logging Device (ELD) mandate in 2018, which put pressure on their capacity. Norfolk Southern benefited from this, and its intermodal segment in particular saw sales jump 18%. As the trucking capacity improved in 2019, the segment sales saw a 2.4% decline. Looking forward, in 2020, the expected decline in segment revenues can be attributed to increased trucking capacity, as well as an overall decline in demand due to the impact of the current pandemic on industrial output.

Beyond Intermodal business, the company’s Coal Freight business is also expected to take a hit. The demand for coal is directly linked to the natural gas prices, which have been trending lower over the past few years. This has impacted the coal shipments for railroad companies. However, Norfolk Southern has fared better than some of its peers, such as  CSX Corporation, which saw a 21% decline in volume, as compared to 15% decline for Norfolk Southern between 2015 and 2019.

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Things are likely to only get worse over the coming months, as the coronavirus outbreak has disrupted global economic growth, and the demand for coal is expected to fall sharply. In fact, The U.S. Energy Information Association (EIA) predicts a 22% y-o-y decline in the U.S. production in 2020. Beyond coal, the oil & gas industry has also taken a hit, led by the oil price war. Oil prices (WTI) plummeted over 50% from $52 levels towards the end of January to sub $25 levels as of May 5. These multi-year low oil prices will likely result in lower production in the U.S., thus impacting the shipment of frac sand, as well as oil related products, which falls under Norfolk Southern’s Merchandise segment, as we detail in our interactive dashboard on Norfolk Southern’s Revenues.

Company Overview

Norfolk Southern is engaged primarily in freight transportation in the eastern United States. Norfolk Southern’s rail network is over 19,000 route miles, and it offers the most extensive intermodal network in the eastern half of the United States. Its customers include chemical producers, industrial manufacturers, agricultural companies, coal, oil & gas, and mining companies, steel processors, and automotive companies pay Norfolk Southern to carry their goods. Norfolk Southern’s competitors include trucking companies, along with other railroad companies, such as Union Pacific, BNSF Railway, and CSX.

Norfolk Southern reported $11.3 billion in Total Revenues for full-year 2019. This includes 3 operating segments:

  • Coal Freight: Coal freight consists of transportation of coal, coke (a by-product of the oil refining process), and iron ore, either on Norfolk Southern’s rail lines or in concert with connecting carriers.
  • Intermodal Freight: Intermodal segment refers to the shipment of containers that can be moved from one form of transport to another.
  • Merchandise Freight: Merchandise freight revenues are derived from the shipment of industrial commodities, including agriculture & consumer products, chemicals, metals & construction commodities, paper, clay, forest, and automotive products.

Our interactive dashboard highlights all the components of Norfolk Southern’s Revenues and compares the company’s top line with peers, Union Pacific and CSX.

Overall, all of the company’s segments are expected to face headwinds in the near term, though Intermodal and Merchandise Freight segments could bounce back faster than Coal Freight segments, which could see volumes drift over the medium to long run. Additional details about how other components of Norfolk Southern’s Revenues have changed over the years and are likely to trend going forward are available in our interactive dashboard. Trefis estimates an outlier case of Norfolk Southern’s stock falling to $110, in view of the current pandemic and its impact on businesses.

Norfolk Southern is not the only railroad company to face the headwinds. Given the current pandemic, and its impact on the economy, CSX’s stock can drop 30% from the current levels of $60.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

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